Recapture Rules for GO Zone Property in an Exchange

The IRS recently released Notice 2008-25 that provides depreciation recapture guidelines for Gulf Coast area property damaged by hurricanes Katrina, Rita and Wilma in 2005. The Gulf Opportunity Zone Act of 2005 provided a first year depreciation bonus on qualified rehabilitation expenditures of "GO Zone property". However, the sale of GO Zone property is subject to recapture of the bonus depreciation under various conditions, including certain 1031 Exchanges.

The rules are fairly technical but essentially this is what it comes down to:

There is no recapture if the replacement property is GO Zone property in the hands of the taxpayer.

There is recapture if the replacement property isn't GO Zone property in the hands of the taxpayer and isn't substantially (80%) used in the GO Zone or in the active conduct of a trade or business by the taxpayer in the GO Zone.

There is no recapture if the replacement property isn't GO Zone property in the hands of the taxpayer but is substantially used in the GO Zone and in the active conduct of a trade or business by the taxpayer in the GO Zone.

To read more about the guidelines as outlined in the Notice, please read about the GO Zone Property Recapture Rules on our website.